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Advice You Can Trust

Financial advisers are popping up like Starbucks shops. They have their uses, but only up to a point.

Before the darkness descended upon the market in March 2000, investing seemed like a game anyone could win. Just open an online account and make enough to buy a private island. Two years later, with their portfolios in ruins, investors are screaming for help. The financial advice business is exploding today. Two-thirds of affluent Americans now use financial advisers, up from 60% in 2000, according to Cerulli Associates. The number of advisers registered with the Securities & Exchange Commission has risen 17% in two years. Big brokerages are turning themselves into temples of financial planning as they watch other operations suffer. Charles Schwab & Co., for instance, in 2000 bought Chicago Investment Analytics to gin up client risk profiles and U.S. Trust to tend to affluent customers. A securities firm can only make so much money crossing online trades for $30 anyway. Why not get a percentage for telling people what to trade?

But can you trust a broker's advice? Do you even need it?

There's much to be said for acting as something of a do-it-yourselfer in personal finance, buying professional help á la carte only when you really need it--say, to write a will or contend with the alternative minimum tax. If you have $1 million in the stock market, you could, for example, park half of it in a low-cost index fund like Vanguard's 500 Index, and hire a pro to manage only the other half. A stock picker (or an actively managed mutual fund) will typically cost at least 1% of assets annually, five times as much as that Vanguard fund. Going passive with half your stock market assets would save you $4,100 a year.

If you have the time and inclination to be more involved in your own destiny, dispense with professional stock pickers altogether (see p. 170). Regardless of how you choose your securities, know how to be coolly judgmental about the results: Use the right benchmarks (p. 180). Know the downside of using a small firm or a solo practitioner (p. 182). At least with big outfits, which likely won't go bust, you stand a better chance of getting something back should your investment crater because of dishonest advice.

Advisers used on a spot basis can be especially useful when you're getting started, helping you set and meet goals. You may need experts most for more arcane things like taxes and insurance (see pp. 188 and 190). The most disinterested advice, if not always the cheapest, will come from someone paid by the hour, not with a sales commission. The table on page 186 outlines the difference.

Just about anyone can hang out a shingle as a financial adviser. Federal law requires either state or federal registration of financial advisers or their firms not already licensed as stockbrokers. But that's mainly a disclosure rule. Many states don't require any training in the field. The best advisers, though, have credentials. An important one is Certified Financial Planner, a designation awarded by the CFP Board of Standards in Denver after classes, some work experience, an exam and a pledge to abide by a code of ethics.

Conduct due diligence on a potential adviser. If your planner is registered with state or federal authorities, get his Form ADV, which tells you about compensation and connections to financial firms. Ask the planner for references. Verify claimed credentials and look for disciplinary problems, which often can be found on the Web site of the credentialing agency. Check the online database of the local newspaper for the planner's name. And remember that, however much professional help you buy, you have to get involved. You cannot abdicate responsibility for your money.